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What kind of business entity should you be?


Before you incorporate, you should carefully consider your options, including where you are at and where you would like to go.

If you are operating as a single person business without any formal business structure, you are considered a sole proprietor. If you are running a business with another person, but similarly without a formal business structure, you are considered a partnership. Sole proprietorships and partnerships do not require any filings to set up and do not provide any protection against personal liability.

During the business ideation phase of your venture, you may deem this risk acceptable, but once you start interfacing with the public, you should consider forming a business entity, such as an LLC or a corporation, to shield yourself against any claims that may be made against your startup — this may be particularly pertinent to blockchain startups because due to the novelty to the technology, the risks are unforeseeable and uncertain.

Talking to a lawyer before making this decision can save you a lot of time and money down the road and give you peace of mind that you made the right decision. The following is an overview of the types of business structures that are available to you to help you understand your options.

If you are operating as a single person business without any formal business structure, you are considered a sole proprietor. If you are running a business with another person, but similarly without a formal business structure, you are considered a partnership. Sole proprietorships and partnerships do not require any filings to set up and do not provide any protection against personal liability.

During the business ideation phase of your venture, you may deem this risk acceptable, but once you start interfacing with the public, you should consider forming a business entity, such as an LLC or a corporation, to shield yourself against any claims that may be made against your startup — this may be particularly pertinent to blockchain startups because due to the novelty to the technology, the risks are unforeseeable and uncertain.

Talking to a lawyer before making this decision can save you a lot of time and money down the road and give you peace of mind that you made the right decision. Clients are often surprised that the process of undoing and redoing their business structure costs a lot more than it would to do it right the first time. The following is an overview of the types of business structures that are available to you to help you understand your options.

Sole Proprietorship

A sole proprietorship is an unincorporated business run by a single person. You may have employees, but you alone own the business.

You can operate a sole proprietorship in your own name or you can get a fictitious business name for your business — also known as a “doing business as” or “DBA.” For example, a pie maker named Jane Doe can operate her business as “Jane Doe” or she can get a fictitious business name and operate as “Jane Doe dba Jane’s Delicious Pies” or simply, “Jane’s Delicious Pies.”

The easiest business entity to form is a sole proprietorship because you become a sole proprietorship by simply running your business. However, unlike other entity-types, you are personally liable for business debts and judgments against your business.

Some states or counties may also require business permits or licenses in order to operate. You may also want to consider getting a separate EIN for your sole proprietorship and are required to if you have employees or if you file an excise or pension plan tax return.

Partnership

A partnership forms when two or more people go into business for profit. Two types of partnerships to keep in mind are general partnerships or limited partnerships. In a partnership, the partners, rather than the partnership, are taxed on the partnership’s income.

A general partnership describes a type of partnership where all partners can enter into agreements on behalf of the partnership and are all personally liable for the partnership’s obligations.

In a limited partnership, certain partners, called, “limited partners,” have limited liability. In a limited partnership, the general partner is responsible for management of the partnership and is also personally liable for the partnership’s obligations. The limited partners, on the other hand, do not participate in the management of the partnership and are thus not responsible for the partnership’s obligations.

LLC

A LLC or a limited liability company is an unincorporated business organization that provides its members with protection against personal liability. Anyone can be a member of a LLC, including corporations, trusts, foreigners, and anyone over 18.

As a LLC, you can choose to be taxed as a corporation, that is, both your profits and the LLC’s profits are taxed or you can choose to be taxed as a partnership, so that only the members are taxed. In addition, unlike a corporation, LLCs do not have to follow corporate formalities and can determine how they will operate through its operating agreement.

Corporation

A corporation is the other form of business entity that can protect you against personal liability. The owners of the corporation are called shareholders and are not personally liable for the obligations of the corporation. If your corporation defaults on a business obligation, for example, you are not required to pay off this obligation with your personal assets.

A “S-Corp” is a corporation that elects to be taxed on the shareholder level only. It can only have 100 shareholders, one class of stock, and shareholders that are U.S. citizens or resident aliens.

A startup that is seeking venture capital, foreign investors, planning to issue more than one class of stock, or has an eye towards an IPO will find that they must be a “C-Corp.” Unlike a S-Corp, a C-Corp is subject to “double-taxation,” meaning the corporation is taxed on its income and cannot deduct dividends issued to shareholders, who are also taxed on these dividends.

Unlike LLCs, which have to follow few formalities, corporations must follow many formalities, such as filing articles of incorporation with the Secretary of State, adopting bylaws, issuing shares, holding and properly notifying shareholders and directors of meetings, and maintaining minutes. Failing to maintain such formalities subjects the shareholders to personal liability.

Social Purpose Corporations

If you are a socially minded entrepreneur, you should consider forming a social purpose or benefit corporation. Normally, a director’s duty in a for-profit corporation is to maximize profits for the shareholders. Any deviation from this goal subjects the director to liability.

A social purpose or benefit corporation allows the directors to consider factors other than maximizing shareholder value without violating their fiduciary duties.

Given the implications that entity choice can have for your business, it is important to consider the goals and objectives of your business as well as the benefits and trade-offs you are willing to make to achieve those goals.

This article is also posted on Medium.

If you have questions, we are here to help. You can schedule a free strategy session with us by clicking here.

This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.

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